You Get What You Paid For

Years ago I wrote a number of articles about Walmart for this and other magazines. I’m sure my earlier pieces included a lot of whining about the asymmetrical warfare that the giant discount chain was bringing to bear against Main Street, and how it was going to change the face of America for the worse, but over time my viewpoint evolved.

My later pieces were more upbeat, suggesting ways that you might successfully compete with Walmart, or that the big box might eventually be helpful to you in some ways. I may also have used it as a glaring example of how not to run your own business.

Eventually I came full circle, to the point where I was actually defending Walmart against its enormous chorus of critics. It seemed to me that Walmart was being singled out by activists, unions and segments of the public for scorn, particularly on the subject of wages. The company was no worse than its competitors in most respects, and in fact paid its employees a little higher than the average retailer.

Perhaps Walmart was functioning as something of an “employer of last resort,” but I didn’t see anything wrong with that. Isn’t it a good thing that somebody is?

At any rate, I finally decided to let it go, and stopped reading and writing about Walmart. Although they were still by far the largest retailer in the world, it seemed like Amazon had become the greater threat to specialty stores, and a better indicator of future trends.

Having not paid any attention for several years, I was surprised on October 15th of this year to come across a headline in the business section of The New York Times that read, “How Did Walmart Get Cleaner Stores and Higher Sales? It Paid Its People More.” The subhead suggested that the pay of Walmart employees may hold the key to the turnaround of the entire global economy. Perhaps it was time to revisit the big box.

Apparently those recent years had not been going so well at Walmart. Sales at established stores fell for five consecutive quarters, which had never happened before in the company’s history. Management set about to look for explanations, and it turned out that they didn’t need to look all that hard.

First of all, the customers were providing plenty of feedback, and most of it was negative. Sales receipts ask shoppers to go to the website and describe their experience on the day of their purchases, through which customers complained of dirty, disorganized stores, empty shelves, nonexistent sales associates and slow checkout lines.

Those reports were confirmed by a firm called Wolfe Research that Walmart hired in 2014 to spot check the stores. They came back with photos of nearly empty and disorganized displays, and the observation that you cannot sell an item that is not on the shelf.

Walmart also reached out to its store managers throughout the U.S., and their response was no less dismal. They reported that their efforts were hampered by employees who lacked ambition, motivation and loyalty. Part of that was attributed to low wages, but employees were also unhappy about scheduling, training, and the scarcity of advancement opportunities, among other things.

In February of 2015, Walmart assembled its U.S. workforce of 1.2 million people to hear a video address from the CEO, Doug McMillon. He told them that the company had gotten some things wrong as it strove to cut costs, and that it meant to rectify those mistakes. For starters, wages were going up.

The company increased its minimum hourly pay to $10 for all employees who complete a training course, and raised department managers from $12 to $15. In two years, the average fulltime, non-managerial employee has risen 15 percent to $13.69 per hour, which has cost the company $2.7 billion per year.

Money, though, was just half the plan, which the company referred to as “The Investments.” It also committed to the construction of 200 training centers throughout the country, where all department managers would take two-week courses in general retail principles such as inventory management and customer service, plus specialized training in their own department.

It may seem obvious to specialty retailers such as yourself, but these new classrooms may be the first places in which the managers have been asked to look at their stores from the customers’ point of view. Now they are being taught how to design displays that draw the eye, and how to adjust product mix according to the relative affluence of the neighborhood.

So, you ask, is the plan working? Well, yes and no.

Those customer feedback surveys on the website have improved steadily for 90 consecutive weeks, showing that the stores are cleaner, faster and friendlier. Surveys from outside firms have had similar results.

Sales have also improved. At established stores, the top line is up 1.6 percent year over year, which is pretty good considering that the category as a whole is down .4 percent. Profits have been a different story.

Walmart’s net income was down 6 percent in the most recent quarter, and much of the decline could be

attributed to the salary increases that were instituted under the new plan. Although its stock price has been up this year, it has underperformed the broader market as investors are still not sure whether “the investments” will prove to be a good idea in the long run.

That idea was not simply pulled out of the air, by the way, but was based on an economic theory called “efficiency wages.” That is whatthe Times was referring to in the subhead of its article, in which it implied that Walmart’s employees might hold the answer to the sluggish worldwide economy.

Basically, efficiency wage theory proposes that companies can benefit from paying employees more than the going rate for their positions, because those employees will become more loyal and productive.

It might be that the premium wages make employees feel more appreciated, or it might make them value their jobs more highly because those jobs would be harder to replace, but either way it seems to work, at least for Walmart. In addition to the employees becoming more loyal, ambitious, and productive, the company has also found that they spend more money at Walmart.

Presumably, they spend more money elsewhere as well, and with 2.3 million employees worldwide, that is quite a lot of consumption. If efficiency wages were to spread to other major employers, some economists think it would ignite growth across the globe.

Then there are the minor employers, like you and me. If we pay our employees more than the market dictates, we risk putting even more stress on our already endangered profit margins, but the rewards could be great.